The Giganet On Its Way? Tucows Inc (NASDAQ: TCX)

The company is in the business of providing Internet services and its segments include Domain Services and Network Access Services. The Domain Services segment has various service offerings such as wholesale and retail domain name registration services, value added services and portfolio. The Network Access Services segment includes mobile services and other services and engages in the sale of retail mobile phones and services (Ting Mobile) to individuals and small businesses through the Ting Website, as well as other network access services, including high speed Internet access, Internet hosting and network consulting services. It focuses on fulfilling the needs of a network of resellers by providing services, interfaces, customer service, reseller-oriented technology, and design and development processes. The focus of its service offerings includes brands, including OpenSRS, YummyNames, Platypus, Hover and Ting.

Investment highlights

There are a number of highlights for potential investors. The company is one of the largest providers of wholesale domain name registration in the world with more than 8 million domain names under management. Consequently, the company has a solid position in this market. It has a large and growing distribution channel and since entering into the domain name market in January 2000, the channel has grown to more than 9000 active resellers located in more than 100 countries. It has established itself as a trusted and well-recognised brand in the industry and using its global distribution network has earned an outstanding reputation for providing exceptional levels of service and support to customers. Using its global distribution network, the company provides Internet services to more than 30 million users worldwide, primarily in the small and medium-sized enterprises segment, which is one of the fastest growing segments in the Internet business. It has a strong financial position with a robust balance sheet and has consistently generated positive cash flow from operations providing a solid platform for future growth. Its business model provides a leverage point and significant growth opportunities through the provision of additional high value added services to its customer base.

Financial results for first quarter FY 2016.

President and CEO Elliot Noss said that the first quarter was a solid start to FY 2016, carrying over the movement in of the previous year with strong year-on-year growth in each key financial metric. Revenues grew by 13% to a record $ 45.6 million on the back of steady performance from the Domain Services business, and continued growth from Ting Mobile resulted in the further growth of gross margin to 33% or so. The company also achieved records for both adjusted EBITDA at $ 7.5 million and net income at $ 4.4 million amounting to an EPS of $ 0.42 per share. The company also took advantage of great business opportunities in the quarter to invest in its core strategies. The Wholesale domain business was scaled up with the acquisition of the international wholesale domain reseller channel of Melbourne, IT, which was closed on 1 April. This acquisition in addition, expands domains under management by approximately 1.9 million, with a minimal addition to operating costs. In addition, there was continued expansion of the gigabit fibre footprint as well as an announcement of Ting Internet’s intention to enter for market, namely the greater Sandport Idaho area undertaking of pre-orders will commence during the quarter.

Net revenue for the quarter increased by 13% from $ 40.5 million in the previous year to $ 45.6 million. Adjusted EBITDA for the quarter grew from $ 6.8 million in the previous year to $ 7.5 million. Net income for the quarter rose to $ 4.4 million (EPS of $ 0.42 per share) compared to $ 2.8 million and $ 0.25 per share in the previous year. The company has reiterated its previous adjusted EBITDA guidance for FY 2016 of $ 30 million.

Cash and cash equivalents at the end of the quarter was $ 10 million compared to $ 7.7 million in the previous year. The increase was primarily due to the generation of $ 5.6 million in cash flow from operations, which is partly offset by using $ 2.2 million to repurchase 98,170 shares of common stock under the buyback program. An investment of $ 0.9 million was made in property and equipment, mainly to support the continued expansion of the Ting fibre footprint and $ 0.2 million was used for loan repayments.

It was an outstanding quarter for Ting Mobile, which added more than 12,000 accounts and 18,000 devices, bringing the total to more than 140,000 accounts and 220,000 devices. This was a significant upturn in relation to recent quarters and was driven by a one-time influx of customers moving from another MVNO, which closed down. In late January,PlatinumTel Wireless, also known as PTel has warned its customers that it will be shutting down the service and has included the company among a few recommend it mobile providers. Roughly 7000 of these customers were acquired and the early experience and usage indicate that they would be welcome addition to the customer base. Churn also dropped to 2.39% in the quarter from 2.70% in the preceding quarter and this would appear to have been cost by three factors. The first factor is seasonality because the company only has a history of just over four years and the rapid growth extended to mask other trends and meaningful data on sustainability based on seasonality is just beginning to appear. The trend seems to be that the first half of the year experience as lower churn with the fourth quarter typically being the worst. The second factor is the growth of GSM customers as a percentage of the customer base. The company believes that GSM customers tends to be more transient, but he was up to that they are proving to be slightly more loyal than the CDMA-base and contributing positively to retention. The third factor is the company’s own retention effort, which seeks to identify action for customers who might leave and there has been some early success which is encouraging.

The bottom line

The company has performed well and we are unenthusiastic about future prospects. The new market of Sandpoint has reasonable density and strong connectivity with the greater Internet. However, the market does have one advantage over the other markets in which the company operates. The best Internet connection that you can buy is extremely slow and reported to be unreliable and expensive. The experience will also be useful in identifying other potential promising markets. We believe that an investment at this point in time will prove positive in terms of the possible upside.

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